What I learned from Prof. Sanjay Bakshi’s Behavioral Economics Course at FLAME University

I had the privilege to attend Prof. Sanjay Bakshi’s Behavioral Economics course at FLAME University.

Being his student since 2011, I realized my dream by sitting in his class for 3.5 days.

Prof. Bakshi taught us around 20 different models from Charlie Munger’s Psychology of Human Misjudgement. His presentation included examples from multiple disciplines including business, finance, investing, evolution, and life.

Classes went till midnight. He taught us 5 hours non-stop during one session. Surprisingly, his intensity and energy levels remained the same throughout. His energy levels reminded me of a dialogue from The Mummy — He will never eat. He will never sleep. And he will never stop.

His presentation for the entire course had over 1,000 slides. Each slide had vivid images or videos chosen thoughtfully so that important ideas latch onto his students’ brains.

I would be remiss if I didn’t mention the awesomeness of FLAME University. The grandiose of the lecture hall. The attention to detail was pixel perfect, including the care to engrave participants’ names in their water bottle.

They ensured that we never starved by feeding us with delicious and quality food. Their staff took care of us like how parents would take care of their children. I can go on and on. If you get a chance, do experience the awesomeness of FLAME University.

In this post, I am sharing my key learnings from Prof. Bakshi’s wonderful course. I tried to connect Prof. Bakshi’s teachings with things I learned elsewhere over the years. If you like it, the credit goes to Prof. Bakshi. Otherwise, blame me.

Create a vivid image for each chunk you want to learn

Which of the two sentences is more vivid?

Free cash flow from See’s Candies was used to acquire other businesses which in turn generated more free cash flows.

or

Just as Adam and Eve kick-started an activity that led to 6 billion humans, See’s has given birth to multiple new streams of cash for us.

It’s much easier to visualize the 2nd sentence than the 1st. Do you know who wrote the 2nd sentence? Warren Buffett.

Why is Warren Buffet’s sentence easier to visualize?

His writing contains concrete nouns like Adam, Eve, and 6 billion humans. Concrete nouns turn on images in our mind’s eye. They make them come alive.

Our brains have spent millions of years evolving to perfect its ability to process images. Around 70% of sense receptors and 30% of our cortex is devoted to visual processing.

Prof. Bakshi leverages the power of visuals throughout his teachings. He uses images and videos for all important chunks he wants to learn deeply.

Let me give a couple of examples from his presentation.

Take a look at this tip from Dan Coyle’s excellent book The Little Book of Talent: 52 Tips for Improving Your Skills.

STARE AT WHO YOU WANT TO BECOME

If you were to visit a dozen talent hotbeds tomorrow, you would be struck by how much time the learners spend observing top performers. When I say “observing,” I’m not talking about passively watching. I’m talking about staring—the kind of raw, unblinking, intensely absorbed gazes you see in hungry cats or newborn babies…

We each live with a “windshield” of people in front of us; one of the keys to igniting your motivation is to fill your windshield with vivid images of your future self, and to stare at them every day. Studies show that even a brief connection with a role model can vastly increase unconscious motivation…

Think of your windshield as an energy source for your brain. Use pictures (the walls of many talent hotbeds are cluttered with photos and posters of their stars) or, better, video. One idea: Bookmark a few YouTube videos, and watch them before you practice, or at night before you go to bed.

He connected Dan Coyle’s tip with the video of a boy imitating Bruce Lee’s Nunchaku scene. Watch the video before reading further.

I am not going to forget the tip “stare at who you want to become” as it’s etched into my brain.

Prof. Bakshi played this scene from the movie Boiler Room where a doctor gets conned into buying shares in a fictitious drug company.

Through this scene he explained how different psychological biases like social proof, liking, envy, scarcity, and authority interplay to con the doctor.

Learning concepts through visuals creates more neural pathways in our brain, which makes it easy to recall the concept whenever we need it.

Before attending Prof. Bakshi’s course, I read the wonderful book Invisible Learning: The magic behind Dan Levy’s legendary Harvard statistics course. This book teaches statistics intuitively. More importantly it teaches how to learn and teach.

Dan’s instructor rating was above 4.8 out of 5 for five years in a row. Anything above 4.2 at Harvard is good, and above 4.5 is exceptional. I could see a lot of similarities between Dan Levy and Prof. Bakshi’s teachings especially when it comes to using vivid images while teaching.

Dan refers to important ideas that he wants his students to remember for life as Airport ideas. He wants his students to remember these ideas and explain it to Dan when they meet him in the airport after five years.

In the classroom, Dan has three big screens at the top. The center screen will have the airport idea explained in the large font, with nothing else to distract from it. The screens on either side will have a memorable image.

For example, to make the cherry picking in statistics memorable, he put a colorful image of a girl picking bright red cherries on the side screen. The goal is to give the students an image that the brain can latch onto when the idea of cherry picking comes up in the future.

Google and YouTube makes it so easy to pick the right vivid image and video for any concept that we want to learn.

Drawing stick figures, boxes, and arrows to capture what I’m learning helps me to understand concepts quickly and deeply.

If you’re like me, then you will pay to not draw. I still remember looking at the title in my 12th Botany record to figure out that I actually drew a rose.

In April, I took a course called Pencil Pirates that convinced me that anyone with little practice can draw boxes, lines, arrows, and simple stick figures. I learned a powerful trick from the course. Say you want to draw a car. Google search “car icon” and draw what you see.

A journey of a thousand miles begins with a single step. In 80 pages, How to Draw Anything helped me take the first step in my drawing journey.

Suppose, I want to capture the essence of Warren Buffet’s masterpiece on How to Minimize Investment Returns through an illustration.

In it, Buffett talks about how Gotrocks Family (fictitious) with the guidance from Helpers got a lesser share of profits that American businesses produced. He concludes this section by writing “For investors as a whole, returns decrease as motion increases.”

To draw these illustrations, I had to read what Buffett wrote several times. Then, I had to think hard to come up with how to best represent his writings through illustrations. This act of reflection made the concept more durable in my brain.

The act of drawing is more important than how well you draw. It forces you to reflect harder. And research shows that reflection helps you to understand, retain, and use the concept when needed.

Perfection is the enemy of progress.

Google “object-you-want-to-draw icon” and draw what you see.

Consider both the positives and negatives

Most of our brains function like a pendulum stuck either on extreme right or extreme left. We cling strongly to things we love and avoid things we hate.

Prof. Bakshi looked at both the positives and negatives for each model he taught us.

For example, we tend to buy an expensive car stereo system after buying a new car. Contrast effects make us insensitive to stereo price when compared to a much higher car price.

Contrast effects prevent us from detecting small changes until it’s too late to adapt after we detect the change. This is why millions of people end up paying interest on their credit card debt. This is why companies and countries go bankrupt. This is why we get fat.

After covering the negative side of contrast effects, Prof. Bakshi taught us how to leverage contrast effects to our advantage.

We’re afraid of learning new things thinking about the effort we need to put in.

Say you want to learn Calculus. It will take a few months of hard work to get a decent understanding. Our brain cries, “no way”. What if we turn a few months into putting one hour of hard work everyday? The problem seems manageable as one hour is a tiny commitment.

Sachin was 16 when he started his international test career. He never faced deliveries that came at 90 to 95 mph before that. He got out for 15 runs and thought that he was not good enough for international cricket. He cried.

In the next game, Sachin shifted his focus from scoring runs to batting for 30 minutes. He scored a fifty and the rest is history. Focusing on 30 minutes (low contrast) is much easier than his score (high contrast and unknown). He overcame self doubt and realized his true potential.

Let’s look at one more example.

Social proof guides us to do wrong things like buying shares in IPOs and highly priced tech companies with questionable business models.

We also benefit from social proof through the wisdom of crowds. Where to eat? What books to read? What movies to watch? Which doctor to go to? Without social proof we might never find the right answer to these questions.

After the recent crash in valuations for private and public technology companies, we tend to focus a lot on the money lost by retail investors who participated in the IPOs. We make fun of VCs funding these technology companies at high valuations. We focus on the negatives.

It’s ok to focus on the negatives, but we should not forget the positives. These companies are fulfilling customer needs and solving customer problems. Ola and Uber empowered me to commute anywhere at any time.

Doordash and Swiggy made it possible to eat tasty foods at the comfort of my home. They’re adding value to their customers. Through the gig economy, they are providing livelihood to millions of people.

Can these business models self fund its growth? Are the valuations justified? They’re different questions that need to be answered. But one shouldn’t ignore the value created by these technology companies.

The key point I’m trying to drive home is to look at both the positives and the negatives on all things. Let the pendulum in our brains swing to both extremes rather than getting stuck at any one extreme.

Don’t jump to conclusions. List down all the possibilities

I have a tendency to explain a complex phenomenon with one big cause. I jump to conclusions without considering all possible causes. We live in a complex world. More often there are multiple causes that combine in novel ways to produce the result.

Why did Srilanka default on its debt? Their policy to abruptly switch to organic farming caused it. Is that the reason? Is that the only reason? There must be several other reasons for it to go bankrupt. But, I never put in the effort needed to dig deeper.

Proving causality is hard. Even simple things like measuring the impact of changing the button color from red to green requires diligent analysis. Proving causality for complex systems like companies and countries is daunting.

I smile when I hear people say that the CEO of a company sleeps in the factory, so it must be a 10x stock. It reminds me of a comedy scene from a Tamil movie where people think a lorry needs a lemon to run instead of its engine and hundreds of spare parts.

Prof. Bakshi gave a couple of examples where he methodically identified multiple causes.

Suppose, you’re the inventor of the digital camera. Proud of your invention, you’re showing it to the CEO of Kodak in 1975. You’re trying to persuade the CEO to migrate from analog to digital camera. What would the CEO of Kodak say?

• High cost
• Poor quality
• Hard to share pictures with others
• Bulky and heavy
• Security issues as it’s easy to lose your digital camera

Imagine yourself as an equity research analyst sitting in an earnings call. You see that EBIT margin is going down quarter-over-quarter. What would be your conclusion? Things are bad would be the first conclusion.

Declining EBIT margins might be good news. In order to conclude if this is good or bad, It’s a good idea to break things down into its constituent parts. This is what first principles thinking is all about.

EBIT margin is computed using (EBIT/Revenue)*100.

EBIT is computed using Revenue – Costs. EBIT margins go down when revenue falls more than cost. Or cost increases more than the growth in revenue. All we need is to identify reasons for decreasing revenue and increasing costs.

• The company is building capacity and it’s yet to be operational. But the depreciation from that investment is flowing into P&L as an expense. Incremental revenue from that investment will come in subsequent quarters.
• Sold a high margin business and used the proceeds to retire debt.
• Pandemic hit and revenue fell for the entire industry. The company has a strong balance sheet.
• Product portfolio mix changed as the new low margin product became a super hit. Several new customers are liking the new product. They might move up to higher margin products in the future.
• Costs went up. But the company was able to pass on the cost increase to customers through price increase. Profits remained the same at the unit level even though profit margins declined at the revenue level. The table below explains this point in detail.

You can read Prof. Bakshi’s explanations on declining EBIT margins here.

As Charlie Munger says, “The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in.”

The key takeaway is to methodically come up with multiple reasons for the observed effect. All we need is a paper, pen, and patience to think. Brainstorming with knowledgeable people helps to come up with even more reasons than doing it alone.

Change your mind when the facts change

Two open minded people with opposing views on a topic will tend to converge on their views after listening to each other’s arguments.

Buffett switching from cigarbutt style investing to owning high quality businesses after listening to Munger is one of the best examples for open mindedness.

Two close minded people with opposing views on a topic will tend to diverge even more on their views after listening to each other’s arguments.

In one experiment, researchers selected people who either favored or opposed capital punishment. Both the groups were given to read two thoroughly researched papers. One paper favored capital punishment and the other opposed it.

After reading both the research papers you expect the two groups to converge. However, they diverged even more as they overweighed evidence supporting what they already favored. People with strong ideologies show this behavior. Politics is the best example.

In the above charts, the point where A and B start from is their current belief. They gather new evidence after talking to each other. A and B combine their current belief with new evidence to get to their new belief. This new belief can move up, down, or stay the same from the current belief.

What I explained to you in the last paragraph is called the Bayes rule. The math formula for Bayes rule is too much for most to handle. Don’t worry about it. Our brains continuously apply Bayes rule without knowing the math formula.

Let’s understand this with a simple example.

Say, you joined a tech company as an intern. Your manager will evaluate your performance and decide if you deserve to be made permanent.

In the initial days, your manager has no data on you to evaluate your performance. But still he will rate you inside his head based on his experience with similar interns like you. Let that initial odds (also known as prior odds ratio) of you becoming permanent is 1 (hire) : 1 (no hire).

During the first month you solve a hard technical problem that helped the company retain their top customer. Your outstanding performance is new evidence (also known as likelihood ratio) for your manager.

This new evidence makes him update your rating of becoming permanent to 4:1 (also known as posterior odds ratio). Your new rating is a function of your prior rating and your recent performance. It’s all intuitive and your manager evaluates you continuously.

It works perfectly as long as the manager weighs each evidence properly. But we know that humans are not rational but rationalizing beings. This is why two managers evaluating the same person can end up with different ratings.

Buffett was rational, so his views converged with that of Munger’s view. Two groups in the capital punishment example were not rational so their views diverged. Better Explained does an outstanding job explaining Bayes Theorem with minimal math.

Let’s look at one more example.

Suppose, you get into a taxi at 10pm and the taxi driver stares at you and smiles weirdly. What are the chances of the taxi driver robbing you?

To answer this question rationally, you need to know the following.

1. What percentage of taxi drivers rob their riders in the night (1%)?
2. What percentage of taxi drivers who rob, stare and smile weirdly (75%)?
3. What percentage of taxi drivers stare and smile weirdly but not rob (10%)?

From the table below, we can see that the odds of the driver robbing you is 1:13 or a probability of 7%.

Visual guide to Bayesian Thinking is the best 10 minutes you’ll spend to intuitively understand Bayes Theorem.

The best part of Prof. Bakshi’s course happened on the night of penultimate day when we all watched the movie 12 Angry Men. It was so good that I read the 12 Angry Men book five days after watching the movie.

A jury of 12 men listened to the testimony involving an 18 year old boy. It’s a first degree murder and the boy’s father was killed. Did the boy kill his father? These 12 jurors must decide if the boy is guilty or not-guilty. All the 12 jurors must unanimously agree on the decision.

If found guilty the boy will be sentenced to death. If there’s a reasonable doubt, then the verdict from the jurors must be not-guilty. At the start of discussion, 11 jurors voted guilty, except Juror 8 who voted not-guilty, 11:1 odds for guilty.

The odds change as the jurors deliberate each evidence. Through Bayesian update, each juror changed their minds from guilty to not-guilty. Some jurors switched when few evidence got invalidated, while others needed a lot more evidence to change.

Humans are not rational but rationalizing beings. Jurors decision making includes both logic and psycho-logic. Biases play a big role in their decision making. For example, Juror 3 was last to switch as the conflict with his son made him resist the truth longer.

Intelligence Analysts use a tool called Analysis of Competing Hypotheses (ACH) to methodically evaluate evidence. It prevents them from jumping to conclusions. I wrote about ACH in detail here.

Psychology of Intelligence Analysis and The Thinker’s Toolkit: 14 Powerful Techniques for Problem Solving, are good books to learn the tools used by intelligence analysts.

The crux of ACH is to construct a M x N table where you create one row for each evidence and one column for each hypothesis. Each evidence gets evaluated against all the hypotheses. If the evidence agrees with the hypothesis, mark it as C (confirming). Mark it as D (disconfirming) otherwise.

You accept the hypothesis that has least disconfirming evidence. It’s the opposite of how we normally think. You can’t prove that All swans are white” even after seeing 1 billion white swans. But that statement can be disproved by seeing a single black swan.

Disconfirming evidence is foolproof.

I constructed the ACH table for 12 Angry Men. There are more than four pieces of evidence, but I kept it to four to show how to construct an ACH table. All 12 jurors picked the not-guilty hypothesis as it has the least (zero) disconfirming evidence.

It’s ok to change your views if it doesn’t hold against the facts.

Concentrate Concentrate Concentrate

Along with studying human weaknesses, psychologists also research human strengths. They look at ways to improve our quality of life. This is called positive psychology and it includes traits like happiness, character, and concentration.

Mihaly Csikszentmihalyi is a positive psychologist who specializes in concentration. His book Flow is a masterpiece.

Mihaly says that quality of life depends on quality of experience.

And quality of experience depends on our quality of focus.

Mihaly says our conscious brain has the capacity to process at most 126 bits of information per second. To understand what another person is saying we must process 40 bits of information each second. So, our conscious brain has limited processing capacity.

What happens to your brain’s processing capacity by keeping the smartphone next to you and studying?

What is concentration? How much of that 126 bits per second can we give to the current activity you’re doing.

Concentration is one of the many ingredients needed for achieving flow.

According to Mihaly, flow is a state in which people are so involved in an activity that nothing else seems to matter; the experience is so enjoyable that people will continue to do it even at great cost, for the sheer sake of doing it.

I’m in flow while playing cricket, debugging a production issue, and while writing this post.

Prof. Bakshi made us watch the lecture on concentration given by Swami Sarvapriyananda. It’s one of the best one hour I have spent in a while. Swami Sarvapriyananda connected the Mihaly’s flow with teachings of Swami Vivekanada and the 8 limbs of yoga.

Swami Vivekananda says that the difference between an ordinary person and a great person lies in the degree of concentration. He designed the symbol of Ramakrishna Mission. Each item in the symbol is there for a reason.

The rising sun represents knowledge. Water represents work. Lotus represents devotion. Snake enclosing it all represents concentration. By combining knowledge, work, devotion, and concentration one achieves spiritual reality or flow.

Like the cobra with tremendous focus on the rat or frog it’s going to capture, we need to have strong mental bearing on the object we’re involved with. It could be a book we’re reading or the software code we’re writing.

Like the cobra with its flaring hood, we need to block out all the distractions. Have you seen how children read? They cover their head, ears, and put their head down to give 100% attention to the book they’re reading. Cut out the outside world (read it as no smartphones). Put all 126 bits on the primary activity you’re engaged with.

Hold and sustain that focus for a long time. And finally, Swami Vivekananda says one must practice detachment. It’s the ability to detach from what you’re focusing and attach to something else in a moment’s notice.

Like Arjuna who only saw the eye of the bird in the archery test, we must give all our 126 bits to one thing we’re working on. Our quality of experience will improve and that will improve our quality of life.